2008 Newsletter

It is that time of year when you should be looking at your tax picture to determine if there is something you can do now to reduce your 2008 tax liability. In 2008, the Economic Stimulus Act of 2008, the Housing and Economic Recovery Act of 2008 and the Emergency Economic Stabilization Act of 2008 were signed into law. This letter summarizes current law, changes that went into effect in 2008 and changes that are supposed to go into effect in later years. It also outlines year-end planning suggestions and the impact they may have on your current and future tax picture. Some of the changes that should have the biggest impact on you are:

You should look at how your life changed in 2008. Has your marital status changed, did you adopt or have a child, open a home business, change jobs, buy or sell a home, pay off or re-finance a mortgage, pay for college tuition? All of these items could affect your tax picture.

Also, remember that effective tax planning requires considering both this year and next (at least). Without a multi-year outlook, you cannot be sure that planning intended to save taxes on your 2008 return will not backfire and cost you additional money in the future. (See last page for "Quick Tax Facts - Tax Changes...." chart.)

With President-elect Barack Obama's plan to raise taxes for those who make more than $250,000, you may want to accelerate income into 2009 and defer deductions to 2010. See pages 5 and 7.

Lowering your taxes starts with tax planning. This newsletter is your guide to use year round. Feel free to contact us at anytime to discuss any of these tax planning ideas and how they may affect your personal tax situation.

For individuals:		For businesses:
	Tax credits, Above-the-line deductions, IRA's and pensions, Tax strategies, Itemized deductions, Other,		Retirement plans, Manufacturing deduction, Tax strategies, Depreciation and asset expensing, Energy deductions and credits, Employer-owned life insurance.

Tax Credits

The following credits are available for 2008. They provide a dollar-for-dollar reduction in your income tax liability.

1) First-time Homebuyer Tax Credit
Taxpayers who purchase their first principal residence (meaning, you did not own a principal residence during the three-year period before the current purchase) on or after April 9, 2008 and before July 1, 2009, may be eligible for a credit on their tax return of up to 10% of the purchase price of the home or $7,500, whichever is smaller. The credit phases out for single taxpayers with an adjusted gross income between $75,000 and $95,000 and married taxpayers with an adjusted gross income between $150,000 and $170,000. This credit must be repaid over 15 years in equal installments (i.e., $7,500 / 15 = $500). If the taxpayer sells the home or no longer uses it as a principal residence before repaying the credit, the unpaid balance becomes due. Essentially, this is an interest free loan.

2) Credit for Retirement Plan Contributions
Eligible lower-income taxpayers may claim a credit for elective deferrals to qualified retirement plans and IRAs (including ROTH IRAs). The credit rate (50%, 20%, or 10%) is for contributions of up to $2,000 per taxpayer and depends on your filing status and AGI. The credit is phased out for joint filers with an AGI of more than $53,000 and for single filers with an AGI of more than $26,500. To qualify, you must be at least 18 years old but cannot be a full-time student or be claimed as a dependent by another.

3) Credit for Higher Education Tuition
The Hope Scholarship Credit is a tax credit equal to 100% of your first $1,200 of tuition and fees and 50% of the next $1,200 (excluding room, board, or books). The maximum credit is $1,800 per student, per year and is only available for the first two years of undergraduate college education. The student must be enrolled on at least a half-time basis.

The Lifetime Learning Credit can be used for undergraduate and graduate level courses (including courses to acquire and improve job skills). The credit for 2008 is equal to 20% of up to $10,000 of qualified expenses. The maximum credit is $2,000 per tax return and is available anytime. The only restriction is that the Hope and Lifetime credits may not be used in the same year, for the same student.

Both of these credits are phased out for joint filers with an adjusted gross income ("AGI") between $96,000 and $116,000 and for single filers with an AGI between $48,000 and $58,000. No credit is allowed for married persons filing separately.

Since there are income limitations, it may be more advantageous for a parent to forgo the dependency exemption and not claim the student as a dependent on their Form 1040. If the student has a sufficient tax liability to absorb the credit, the student will file his or her own tax return and take the credit. Also, the student can take his/her own personal exemption if he/she provides more than one-half of his/her own support. This could reduce the overall tax liability of the family.

4) Credit for Children Under 17
A $1,000 Child Tax Credit is available for each child under the age of 17. The credit is phased out with AGI's in excess of $110,000 for married taxpayers filing jointly, $75,000 for single taxpayers and $55,000 for married taxpayers filing separately. Under certain circumstances, the credit may be refundable. The maximum credit of $1,000 is scheduled to stay in effect through 2010.

5) Credit for Child or Dependent Care Expenses
If you and your spouse work and have childcare expenses for children under age 13, a credit of up to $600 per child (maximum credit $1,200) is also available. The credit is equal to 20% of your eligible employment related child and dependent care expenses; the maximum expenses counted are $3,000 for one dependent or $6,000 for two or more dependents. The credit may also be available for the cost of taking care of an elderly parent you support or a spouse who can't care for themselves.

6) Energy Tax Incentives
A) Alternative Motor Vehicle Credit
You could receive a credit for the purchase or lease of a car or truck powered by certain alternative fuels. For hybrid and lean burn vehicles, the credit can be as much as $3,400, however, the credit is phased out when a manufacturer sells 60,000 of these vehicles. Fuel cell and other alternative fuel vehicles may qualify for larger credits. The credit may not reduce your AMT tax under a complex set of rules.

B) Energy Efficient Property Credit for Any Personal Residence Extended Through 2016
A credit (generally, 30% of the cost up to a maximum credit of $2,000) is available for installing solar photovoltaic property, solar water heating or fuel cell property. Additional equipment now qualified for this credit is small wind energy equipment and geothermal heat pumps. The credit for fuel cells is only available for your principal residence and none of these purchases can be used to heat hot tubs or swimming pools. Starting in 2009 there is no annual cap on the credit for solar electricity generation equipment. This credit can offset AMT liabilities.

C) Energy Property Credit for Your Principal Residence Expired in 2007 Will be Restored in 2009
A credit (generally, up to $500 lifetime) is available in 2009 for the purchase of qualified energy efficient improvements for your principal residence such as metal roofs coated with heat-reduction pigments, advanced main air circulating fans, natural gas, propane, oil furnace, hot water boiler, exterior windows, insulation material, exterior doors, etc. that meet certain energy efficiency standards

Even if you or your children are out of school, you may be able to deduct up to $2,500 of interest paid on student loans (no deduction is allowed for AGI's of more than $145,000 for joint filers and $70,000 for single filers). You do not have to itemize in order to take this deduction.

If you can not claim the HOPE or Lifetime Learning Credit due to AGI phase-out ranges, you may be eligible to take an above the line higher education tuition deduction. A $4,000 deduction is available to single filers with AGI's of $65,000 or less and joint filers with AGI's of $130,000 or less. The deduction is reduced to $2,000 for single filers with AGI's between $65,000 and $80,000 and joint filers with AGI's between $130,000 and $160,000.

An above the line deduction up to $250 is available to education professionals (kindergarten through Grade 12) for out-of-pocket classroom expenses. Expenses exceeding this amount may be deducted as an employment related miscellaneous deduction subject to a limitation of two percent of AGI.

The deduction (in computing AGI) for health insurance paid by self-employed individuals is 100%.

Consider establishing a HSA account if you have medical insurance with a high deductible. This will enable you to take an above the line deduction for medical expenses instead of limiting the deduction to 7.5% of your adjusted gross income.

Deductible IRA contributions of up to $5,000 can be made for 2008. For those individuals 50 and older, IRA catch-up provisions increase the contribution limitation to $6,000. If you and your spouse are active participants in employer sponsored retirement plans, you are eligible to make deductible IRA contributions if your AGI is below $85,000 for married filing jointly and below $53,000 for single individuals. The deduction is phased out between $85,000 and $105,000 (joint) and $53,000 and $63,000 (single). For joint filers where one spouse is not an active participant and the other is, a deduction is allowed for the non-active spouse when the AGI is below $159,000. A contribution can also be made for a non-working spouse under most circumstances.

If you cannot make a deductible or Roth IRA contribution because of limitations, consider making a non-deductible contribution. The earnings are tax-deferred until you take withdrawals.

If your child has earned income from a summer job or baby-sitting, consider a deductible IRA or non-deductible Roth IRA. They can make IRA contributions up to the smaller of $5,000 or their earned income.

Roth IRA distributions are tax-free (see below) but the contributions are not deductible. You can split a contribution of up to $5,000 per person, between a traditional and a Roth IRA (for example, $2,500 to each-subject to AGI limitations). In addition, a $1,000 "catch-up" contribution is allowed for taxpayers age 50 or older. Eligibility to contribute to a Roth IRA phases out for single individuals with an AGI between $101,000 and $116,000 and for married couples filing joint returns, between $159,000 and $169,000. Earnings grow tax-free in a Roth IRA and distributions are tax free if they are made after a five-year holding period and are after 1) age 59-1/2, 2) death, 3) disability, or 4) the purchase of a first-time home (lifetime maximum of $10,000). The Roth IRA does not require distributions after the age of 70-1/2 like a traditional IRA. Also, contributions can be made to a Roth IRA after 70-1/2.

Individuals may be able to contribute to a Roth 401(k) plan (if the plan is amended to accept such contributions). Roth 401(k) contributions do not reduce your taxable wage income; however, earnings grow tax-free and distributions are tax free. The annual contribution limit is higher than a Roth IRA. You can contribute $15,500 in 2008; $20,500 if you will be 50 by December 31, 2008.

The law allows individuals or married couples filing a joint return to convert their traditional IRA to a Roth IRA. Starting in 2008, individuals can arrange for direct rollover conversions from qualified retirement plans into Roth IRAs. This privilege is allowed only if your AGI is $100,000 or less (not counting the converted amount). The entire conversion is taxed. Converting at this time may seem especially smart if your IRA investments have declined significantly in value but only if you expect to be in a higher tax bracket in the future. In 2010, the AGI restriction is eliminated and higher-income taxpayers will be allowed to convert their IRA accounts. In addition, for Roth conversions that occur in 2010 only, taxpayers can include half of the amount in taxable income in 2011 and the other half in 2012.

A conversion can be reversed up to the due date of your return (including extensions). So, if 1) your AGI is more than $100,000, 2) the value of transferred securities dropped or 3) you changed your mind, you're not stuck with your decision.

Maximize your contributions to employer-sponsored retirement savings plans before year-end. Your contributions and any earnings on those contributions generally won't be taxed until you begin receiving funds from the plan. You may be able to contribute up to $15,500 to a 401(k) or 403(b) plan. For those individuals 50 or older an additional $5,000 may be contributed (if the plan permits catch-up contributions to be made). Additionally, the maximum annual deferral limit in a SIMPLE plan is $10,500, and those age 50 or older can make extra, catch-up contributions of $2,500 (if the plan permits catch-up contributions to be made). If you work for certain tax-exempt organizations and they have combined a 403(b) plan with a 457 plan, an individual can potentially contribute up to $41,000. Check with your employer as to if and when you can change your contribution amount.

Extended through 2009, taxpayers who are age 70-1/2 or older can have up to $100,000 distributed from their IRA directly to a tax-exempt charity and avoid paying tax on the distribution. This includes amounts that are required minimum distributions. It does not apply to distributions from SEPs or Simple IRAs. This benefits taxpayers who would donate to the charity anyways and do not itemize deductions or whose itemized deductions are phased out.

Reminder- If you are required to take a distribution in 2008, remember to do it before December 31, 2008 or you may be subject to a 50% penalty.

Workers who move from job to job have flexibility when it comes to investing their retirement funds. Tax-free rollovers are permitted between different types of plans. And more choices are available to surviving spouses who want to roll over a decedent's distributions. A surviving spouse may roll over a distribution from a qualified plan or IRA into an IRA or into a qualified plan, 403(b) annuity, or 457 plan in which the surviving spouse participates.

In addition, a tax-free rollover of direct trustee to trustee transfers from a deceased person's IRA or retirement plan into a non-spousal beneficiary's IRA will be permitted. The rolled-over amounts will be subject to the minimum required distributions rules that apply to inherited IRAs.

If you will be in a lower tax bracket in 2009 (versus 2008), it may pay to receive income in 2009 rather than in 2008. For example, ask your employer to defer your year-end bonus until January 2009 or if you change jobs, don't take cash distributions from your company retirement plan. Leave the money in the plan or roll it over to an IRA or other qualified plan. Also, you can invest excess cash in Treasury bills that don't mature until next year or in certificates of deposit that won't let you take out interest without penalty until 2009. In each case, all of the interest earned would be reported on your tax return for 2009 that will be filed in 2010.

However, if you expect to be in a higher tax bracket in 2009 (for example, your spouse may be returning to work next year or if you plan to marry in 2009 and you and your spouse will both have income) or your head-of-household or surviving spouse status ends after 2008, income deferral is not the best tax strategy.

If you will pay AMT for 2008 but not for 2009, accelerating income into 2008 may produce tax savings.

Capital gains on sales of investments are taxed at different rates, depending on how long you have owned the investment. For most investments owned more than one year, the maximum capital gain rate is 15% for individuals in the 25% and higher tax brackets effective through 2010. People in the 15% or 10% tax bracket will pay a 0% tax on their long-term capital gains for 2008 through 2010. Long-term capital gains attributable to depreciation from real estate will be taxed at a maximum rate of 25%. The gains on collectibles (antiques, artwork, stamps, etc.) will be taxed at a maximum rate of 28%. Certain small business stock is taxed at a maximum effective rate of 14% but may cause an AMT tax. The gain on an investment owned a year or less is taxed at your ordinary income tax rate, which may be as high as 35%.

Based on the various rates, you should consider the length of time you've held an investment before you sell. For example, postpone taking gains on appreciated investments until the more-than-one-year holding period has passed.

Under current tax law, every dollar of capital loss can be used to offset capital gains. If you have an overall capital loss, you can deduct it dollar-for-dollar against ordinary income (compensation, dividends, interest, etc.), up to a maximum of $3,000. Any excess will be carried forward. Therefore, if you have large gains, it might make sense to generate some offsetting losses on investments you no longer want to hold. But, be careful to avoid the "wash sale" rule on losses if you plan to replace the investments that were sold with substantially identical securities. Conversely, if you expect high losses in 2009, you may want to postpone realizing gains until then. Remember to include mutual fund long-term capital gain distributions in your planning.

Qualified dividend income (i.e., certain dividends from mutual funds and stocks including any privately-held C corporation in which you were a shareholder) continues to be taxed at a top rate of 15% through 2010 and at 0% for taxpayers in the two lowest brackets from 2008 through 2010. There are certain restrictions with respect to the holding period of the security.

Currently, if you sell your home and 1) you owned and used the home as your main home for 2 years or more out of the last 5 years and 2) you have not sold another main home during the last 2 years, you may exclude up to $250,000 of gain if you are single or up to $500,000 of gain if you are married. The exclusion does not apply if you acquired the property through a like-kind exchange within the last 5 years. Surviving spouses have two years following a spouse's death to sell a primary home and claim the $500,000 exclusion.

For sales after 2008, the gain exclusion will be reduced for the period of time of nonqualified use. Generally, nonqualified use is any period (after January 1, 2009) during which the property was not used as your principal residence. For example, a married taxpayer rented their home for 2 of 5 years and lived in their home for 3 of 5 years. The home sold for $700,000, cost $400,000 which resulted in a gain of $300,000. Under the old law, all of the $300,000 gain was excluded from income tax. Under the new law, 2/5 of the $300,000 gain or $120,000 would be included in income for the 2 years it was rental property which is nonqualified use. The remaining $180,000 (3/5 of the $300,000) would be excluded from income tax.

In 2008, the kiddie tax age increased again. Children under the age of 19 and students under the age of 24 will be taxed at their parent's rate when investment income is greater than $1,800. For income less than $1,800, he/she may have an effective tax rate of only 5%. Since interest, dividend and capital gain income over $1,800 is taxed at the parent's rate (up to 35%), parents should consider assets that are likely to appreciate over the long-term over assets paying dividend and interest for their children.

There is no tax on the income in a Coverdell education savings account and the distributions are also tax-free if used for qualified expenses which include a wide array of education expenses, such as elementary and secondary public, private, or religious school tuition and expenses, extended day programs, computer purchases and connections to the Internet. The non-deductible annual contribution limit for such an account is $2,000 which is reduced if your AGI exceeds $190,000 for married taxpayers filing jointly or $95,000 for single taxpayers. Contributions for 2008 may be made as late as April 15, 2009.

Qualified tuition programs (also called "Section 529 Plans") generally allow taxpayers to buy tuition credits or certificates for their children, grandchildren, nieces, nephews, etc. or to make contributions to an account set up to meet their qualified higher education expenses. Distributions are tax-free if used for qualified higher education expenses (e.g., college tuition). A special gift tax election applies to qualified tuition programs; it enables you, your parents, brothers, sisters, etc. to gift up to $60,000 in a single tax year to the program on behalf of a beneficiary and avoid all transfer taxes. However, the annual gift tax exclusion becomes $-0- (instead of $12,000) for five years so that any other gift to that beneficiary is subject to gift tax.

If your child has a UGMA or UTMA account set up in his/her name, you can transfer the funds into a 529 plan. However, because a 529 plan takes only cash, the UGMA/UTMA investments must be sold and any applicable tax paid. In addition, a UGMA/UTMA 529 plan will be subject to the rules for both types of accounts.

Investing for appreciation instead of current income usually makes sense at any tax bracket. It is better to pay taxes later rather than sooner (unless it pushes you into a higher tax bracket or because tax rates are going up); you will earn more because of compounding.

Since consumer interest expense (i.e. credit cards, auto loans) is not deductible, you should take steps to minimize it. A good source of funds to pay off consumer debt is a home equity loan, especially with the current low interest rates. Up to $100,000 can be borrowed against the fair market value of your home. If the loan is secured by your home, the interest paid is fully deductible (but may cause an AMT tax). However, be careful, because if you default on the loan, you could lose your home.

You can claim an exemption for yourself, your spouse, your qualifying children and any other qualifying relative (if you provide over half of the relative's total support and his/her gross taxable income is less than $3,500).

In addition, if you are single, you can file as head of household (which is more favorable) if you claim a parent as a dependent (see above) and you pay for more than half of the cost of maintaining their residence...even if it is a rest home or old age home. Single parents may also qualify as head of household.

For 2008 and 2009, taxpayers who can not itemize deductions will be able to increase their standard deduction by the lesser of the real property taxes they paid or $500 for single taxpayers and $1,000 for married taxpayers. This means that for 2008, single taxpayers may be able to increase their standard deduction from $5,450 to $5,950, married taxpayers from $10,900 to $11,900 and head-of-household taxpayers from $8,000 to $8,500.

If you itemize deductions you can deduct state and local sales taxes if you do not deduct state and local income taxes. Since Florida does not have an income tax, Florida residents will deduct sales tax. If you are considering purchasing big-ticket sales tax items, you should consider purchasing them in 2008 or 2009.

Premiums paid for private mortgage insurance contracts issued after 2006 continue to be deductible through 2010. This deduction is phased out for married and single taxpayers with AGI's greater than $100,000.

For 2008, marriage penalty relief continues to be in effect increasing the standard deduction to $10,900 for married couples filing joint returns. This amount is double the standard deduction for single individuals, which is $5,450 (for those over 65, the amount is higher).

Unreimbursed medical expenses are deductible only after they exceed 7.5% of adjusted gross income. Consider long-term care insurance. Certain policies are treated as medical expenses, but only after separate limitations are applied. Miscellaneous itemized deductions such as unreimbursed employee expenses are deductible only after they exceed 2% of AGI. Bunching deductions into a single tax year (2008 or 2009) can help beat these limitations. Also consider paying your January 2009 state estimated tax in December 2008. Be careful not to offset this planning technique by shifting income into the year in which you bunch deductions or by creating an AMT tax.

Watch out for the rule designed to discourage "excessive" bunching by higher income people. Part of your itemized deductions is disallowed when your AGI exceeds $159,950 ($79,975 if married filing separate). This "antibunching" rule does not apply to medical deductions. At a minimum, you can take 20% of your itemized deductions (after figuring the 7.5% medical and 2% miscellaneous limitations) or the standard deduction, whichever is larger. Because you always get the standard deduction, it may still pay for you to bunch deductions.

The antibunching rule is being phased out from 2006 through 2009; it should not apply in 2010 but is supposed to reappear in 2011.

There is no deduction allowed for donations of used clothing and household goods that are not in good condition unless it is a single item worth more than $500 for which a qualified appraisal is attached to your return.

Cash donations are not deductible unless the donor has either a cancelled check or a written communication from the charity that adequately documents the donation. For cash donations greater than $250, you must obtain a charity-provided statement which states 1) the amount of cash or the property donated and 2) whether the donee organization provided any goods or services in consideration for the cash or property donated.

If you plan to make a contribution to a public charity before year-end and you own appreciated stock, consider keeping your cash and donating the stock. By doing this, you avoid paying tax on the donated stock's appreciation but still receive a deduction for the stock's full value (as long as you've owned it for more than one year prior to the donation). The charity also benefits because it can sell the property and not pay taxes on it. On the other hand, if you own depreciated stock, consider selling the stock and then donating the proceeds to charity; you may be able to deduct both your capital loss and your contribution. Consider a charitable trust if you want income from the property while still getting a partial contribution deduction.

If you charge a contribution to a credit card, it is deductible in the year charged, not when payment is made.

If you deduct state and local taxes, miscellaneous deductions (such as employee business expenses), claim multiple dependents or recognize a large capital gain, you could be subject to the alternative minimum tax. It is a tax over and above your "regular" tax.

There is another one year patch to the AMT that increases the exemption amounts to $69,950 for married taxpayers and $46,200 for single taxpayers to help to insulate middle-income taxpayers from this tax. In addition, nonrefundable personal credits such as dependent care credit, education tax credits, adoption credit, child tax credit, retirement saver's credit and energy-efficient improvements credit can be utilized to offset the AMT liability.

Taxpayers are allowed federal income tax-free treatment for up to $2 million of forgiven principal residence mortgage debt through 2012, including debt that has been reduced through a restructuring or mortgage workout. If you exclude the canceled debt from income and you continue to own the residence, you must reduce the basis of the residence. This will increase any gain on sale (or change a loss into a gain). The gain may be eliminated by the home sale exclusion.

If your employer provides group disability insurance, you should check with your employer to determine what benefits you are entitled to if you were to become disabled. For example, how much are you covered for, is there a monthly maximum that you will receive, what determines if you are disabled and whether the payments you receive are taxable. Consider getting your own policy. Among other possible benefits, any payments you receive would be tax-free.

To avoid underpayment penalties, you must pay estimated tax in four equal installments (or as withholding taxes) equal to 90% of your 2008 income tax liability, or 100% of your total tax for 2007, whichever is lower. If your 2007 AGI was over $150,000 ($75,000 if married filing separately), you must pay in 110% of your total tax for 2007 or 90% of your 2008 tax, whichever is lower. You won't owe an estimated tax if the tax shown on your 2008 return (after withholding) is less than $1,000. A tax projection can help you evaluate whether your withholding or estimated tax should be increased or decreased. Ask us about doing one for you.

If you didn't qualify for the maximum economic stimulus rebate check on your 2007 return, you may still be able to receive the difference between the amount already received in 2008 (if any) and the larger amount based on your 2008 tax return information. The maximum rebate for an individual is $600 phasing out for single taxpayers with adjusted gross income between $75,000 and $87,000. For married taxpayers the rebate is $1,200 phasing out with adjusted gross income between $150,000 and $174,000. In addition, a $300 rebate is available for each qualifying child of the taxpayer's who meet the above income limitations. To be eligible you must have a valid social security number, file a tax return and have qualifying income greater than $3,000. Qualifying income consists of income such as wages, self employment income or social security benefits.

A business can set up a retirement plan and take a 2008 tax deduction for contributions paid before the filing deadline of your 2008 tax return (as long as the plan was in existence no later than December 31, 2008 and no later than October 1, 2008 for a Simple IRA). A different kind of plan (a SEP-IRA) can be set up and funded as late as the due date of your return (including extensions). Total contributions to all qualified retirement plans (including Keogh plans if you are self-employed) cannot exceed certain limits based on income levels. When you start a plan, you may be entitled to a credit of 50% of your administrative costs (up to $500 per year for 3 years).

Self-employed individuals who have no employees (other than their spouse) have a pension plan option (a "single-participant" 401(k)) that allows the owner to contribute up to $46,000 per year ($51,000 if over age 50) into the plan. Contributions can also be made for a spouse who is a paid employee. These contributions reduce your income tax but not your self-employment tax (or your spouse's social security and Medicare tax, if any). If you hire additional employees, the plan must be up-graded to a full blown 401(k) that covers the additional employees. Limitations may apply if you are a participant in another pension plan.

Some businesses are allowed a deduction for domestic manufacturing and production activities in the U.S. The deduction equals 6% of the lesser of qualified production activities income or taxable income. The percentage rises to 9% in 2010 and after. The deduction cannot exceed 50% of the W-2 wages allocable specifically to the domestic production gross receipts.

If you expect to be in a lower tax bracket in 2009 (versus 2008), it may pay to defer income into 2009 from 2008. This only works if you use the cash method of accounting for your business. Make sure that this will not significantly increase the risk of not getting paid. If you use the accrual method of accounting, you must delay the shipment of goods in order to shift income.

If you are subject to self-employment tax (15.3% on up to $102,000 of earned income in 2008 plus 2.9% on income over $102,000) you may want to hire your child to work in your business-if it is a sole proprietorship. First, your child's wages are fully deductible as a business expense. Second, children under age 18 who are employed in a parent's business are not subject to Social Security tax on their wages - and neither is their parent/employer. However, payroll tax returns and W-2's would still have to be filed. A child with earned income receives a standard deduction of up to $5,450 for 2008 and qualifies for an IRA deduction of $5,000, totaling up to $10,450 free from federal income tax.

If you find yourself with excess inventory, you may consider contributing some to charity. Under certain conditions, you may deduct not only the cost of the goods, but half of the lost profit as well (not to exceed twice the cost) (subject to other limitations).

A) Enhanced Asset Expensing Election for 2008
For 2008 only, if you own a business, have net business income and buy less than $800,000 of equipment (increased from $510,000), you can now expense up to $250,000 (increased from $128,000) of the cost instead of depreciating the asset over time. Automobiles and real property do not qualify for this election.

Trucks and vans do qualify for section 179 expensing if they have a gross vehicle weight of more than 6,000 pounds. For SUVs that have a gross vehicle weight of 14,000 pounds or less, the expense is capped at $25,000.

For self-employed taxpayers, a last-minute purchase may save self-employment tax and increase the amount of AGI related deductions (medical expenses and miscellaneous itemized deductions).

B) 50% First-year Bonus Depreciation Returns
For 2008, purchases of qualified property with a depreciation period of 20 years or less (which includes qualified leasehold improvement property) will be eligible for additional 50% bonus depreciation in the first year. In addition, for new vehicles purchased in 2008, an additional first-year depreciation deduction of $8,000 will be allowed. Thus the first-year limitation on regular depreciation for new "luxury" business automobiles for 2008 is $10,960 ($8,000 + $2,960) and $11,160 ($8,000+$3,160) for "light" trucks and vans.

C) 15 Year Depreciation for Qualified Leasehold Improvements
Extended through 2009, qualified leasehold improvements to nonresidential property and qualified restaurant property placed in service can be depreciated over 15 years instead of over 39 years. 15- year property now includes qualified retail improvements. Property placed in service in 2008 will be eligible for 50% bonus depreciation.

If your business owns real property, consider a cost segregation study to maximize your depreciation deduction. You can accelerate depreciation by properly identifying and pricing nonstructural items and land improvements separately from the building. This can be done on newly acquired property as well as on property acquired in previous years.

Extended again through 2013, an immediate deduction (instead of depreciation) of up to $1.80 per square foot may be allowed for qualified energy-saving improvements such as interior lighting systems, HVAC, hot water systems and building envelopes. To qualify, the improvements must meet certain requirements which include meeting a 50% reduced energy consumption standard.

Contractors may be eligible for a $2,000 credit per home for homes certified to have an annual heating and cooling energy consumption that is at least 50% less than a comparable home and meet certain other requirements.

Proceeds from employer-owned life insurance may be taxable income if new notice and consent requirements are not met. Employers who purchase life insurance policies on their employees after August 17, 2006 in which their business is a beneficiary are subject to the new rules. The employee must be notified in writing and agree to be insured before the policy is issued. In addition, an annual return must be filed. Please consult with your insurance advisor.

Before the end of the year, consider accelerating any routine plant and equipment maintenance that is scheduled for early 2009. Take a look at your office and general supplies and consider restocking before year-end if they are running low. If you have business travel or meetings scheduled in early 2009, for which the dates are flexible, you might want to push one or more events to 2008 to accelerate the deduction. If you are on the cash method of accounting for your business, you must pay for (or charge to a credit card) the expenses in 2008 to get a deduction. Pre-paying an expense does not accelerate a deduction.

If you are concerned about the federal estate tax or simply want to transfer money or securities to children or others, you should consider taking advantage of the $12,000 annual gift tax exclusion by making gifts before the end of 2008. Gifts have the added attraction of removing income from the donor's tax returns in future years. Married couples can make joint gifts of up to $24,000 per donee, per year without paying any gift tax. These gifts will not reduce the unified estate tax exemption (which is $2,000,000). Make sure the check, or stock transfer, clears the bank, etc. in 2008 to avoid any questions. Note, in addition to the annual exclusion, you can make direct payments to schools (tuition only) and doctors and hospitals. These types of gifts do not count toward the annual exclusion. Additionally, the top estate and gift tax rate is 45% for 2008 and 2009.

With the continuous tax law changes, it may be advisable to have us look over your wills to assure that any necessary changes are made in order to avoid any unsuspected outcomes. Estate planning is also more than having wills and reducing (or eliminating) your estate tax. It is about making sure that your heirs receive what you want them to . . . at the lowest possible tax cost. Ask us about life insurance trusts, generation skipping trusts and how changing the beneficiaries of your retirement and IRA plans can increase what you leave to your loved ones.

Ask us about protecting your assets from creditors through spousal transfers, life insurance and annuities, family limited partnerships, retirement plans and IRA's.

Year End Newsletter and Tax law Changes For 2008

Year End Newsletter
and Tax law Changes For 2008